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World Bank: Global Economy at Turning Point

October 27, 2009 2:32 AM

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World Bank: Global Economy at Turning Point

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With the world's principal economic organizations, the World Bank and International Monetary Fund (IMF) , preparing for their semi-annual meetings (April 15-16) here in Washington, there is increasing concern about perceived imbalances in the world economy. A principal worry is China's soaring exports as well as its policy of holding its currency exchange rate fixed against the U.S. dollar.

In its latest global financial report, the World Bank warns that the three-year-long world economic recovery may have peaked. The bank's chief economist says the world economy is at a turning point and that global imbalances are increasing. To minimize the risk of a crisis the bank is calling for coordinated efforts to bring down the large trade and budget deficits in the United States and restrain the surge of exports from China.

Morris Goldstein, a researcher at Washington's Institute for International Economics, says the Chinese currency is undervalued by 25 percent. This undervaluation, he says, fuels a continuing rise in low-cost exports, rapid expansion of the trade surplus, and a huge accumulation of U.S. dollars.

"When you have international reserves increasing by 11 to 13 percent of gross domestic product for two years running, you have one king-size imbalance," he said.

Mr. Goldstein says Chinese exports are continuing to soar, with exports up over 30 percent in just the first two months of this year.

Martin Wolf, the chief economics commentator at London's Financial Times and the author of a book on globalization, says China and the rest of Asia need to revalue their currencies to reduce global imbalances.

"It is clear that, to my mind, China plays not so much a role on its own, which it does, but I think it is also the anchor for the exchange rate policies for virtually all other Asian countries," he added. "They will not move if China doesn't. What I would like to see is a move by the whole of Asia together, as there as already been a move, as of course you know, a very sizable move by the Europeans, the British and other currencies. The entire world needs to revalue against the United States dollar."

Mr. Wolf spoke at the Institute for International Economics.

Global imbalances are regarded as destabilizing because of fear that investors could, at some point, lose faith in the dollar and trigger a sharp decline in its value. Were that to happen, world interest rates would probably rise very sharply and economic activity would dramatically slow down.

Last year, the world economy expanded by four percent, its best performance in 30 years. However, rising interest rates and rising inflationary pressure combined with sharply higher oil prices could cause a slowdown in growth.